midterm practice 10

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Economics

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Jan 9, 2024

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Financial Economics Midterm Practice Financial Economics Practice Midterm Question 1: Portfolio Theory a) Define the Capital Market Line (CML) and explain its significance in portfolio theory. b) Discuss the concept of diversification in the context of a portfolio. How does diversification contribute to risk reduction? Question 2: Efficient Market Hypothesis (EMH) a) Define the Efficient Market Hypothesis (EMH). What are the three forms of EMH, and how do they differ? b) Provide an example for each form of EMH and explain how it illustrates the respective level of market efficiency. Question 3: Asset Pricing Models a) Compare and contrast the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT). Highlight their assumptions and main differences. b) Discuss the factors that can affect the expected return of an asset according to the CAPM. Question 4: Behavioral Finance a) Define behavioral finance and discuss how it differs from traditional finance theories.

b) Provide an example of a behavioral bias that can influence financial decision-making. Explain its impact on market outcomes. Question 5: Financial Derivatives a) Explain the concept of financial derivatives and provide examples of commonly traded derivatives. b) Discuss the role of options in risk management. How can an investor use options to hedge against unfavorable market movements? Question 6: Corporate Finance a) Describe the Modigliani-Miller Propositions. What are the assumptions underlying these propositions, and how do they relate to capital structure decisions?

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